How to Create Wealth | Truth or Skepticism

Today was a big moment for Tom and Dylan as they celebrated their 50th episode of Truth or Skepticism. Nearly two years and an additional eighty collective pounds ago, Dylan and Tom first sat down across from one another, debating whether the best approach to investing is active or passive.

Ask anyone what it means to be active in the market and you will likely hear opinions. Those opinions might be on the market as a whole or individual stocks or commodities. More than likely, however, those opinions will revolve around direction. Whether it is because of mainstream financial media, traditional financial education or both, as a society we define “active investing” as directional opinion-based trading. Time for a new dictionary.

When talking about “active trading,” we are not talking about being directionally correct. We cannot consistently be directionally correct. But that does not stop us from directionally trading our opinion. However, what allows us to successfully trade an opinion is our active engagement. All the things we do around our opinion is what “active” means in tastytrade vernacular. Fifty episodes later, Tom seems to have gotten through to Dylan.

Though they did not discuss it today, we all know Tom is short stocks and short bonds. Why? Because he has an opinion both asset classes are headed lower. Traditional finance considers those positions as being active. The actual truth is, those are passive positions.

An active trader is not someone who picks direction like shorting bonds. That is a gambler or, at best, a scalper. Active traders might short bonds but they then sell puts against that short position to better their cost basis and lower delta risk. They also sell option premium in high volatility assets, then close those positions once they reach a certain percentage of maximum profit. Active traders maintain many positions, or occurrences, in uncorrelated assets so one statistically unlikely move does not wipe out a portfolio. An active trader does all that while maintaining their core position of whatever they choose. But that core position is simply an opinion. In other words, passive. Active trading is all those other things done around that core.

Like many of us, Dylan was victim to an outdated understanding of what it means to be an active investor. It was not his fault and many of us once held the same belief, plenty more still do. But the game has changed. Advances in technology and research have forever changed investing. The only thing that has not changed is the choice we all have to make. Ultimately, the onus rests on us, individually, to take responsibility for our finances. We can opt for an exclusively passive route and hand our money over to someone who will siphon off tens if not hundreds of thousands of dollars for doing next to nothing. Or, we can take ownership, utilize the tools and research available and determine our own financial destiny.

Fifty episodes later we are all better informed, smarter and in some instances, slimmer traders.

Josh Fabian has been trading futures and derivatives for more than 25 years.

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